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Required Minimum Distributions

Overview of the Regulations and Your Options

Required minimum distributions, often referred to as RMDs or minimum required distributions, are withdrawals that the federal government requires you to take annually from traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans after you reach age 70 1/2 (or, in some cases, after you retire). You can always withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal penalty.

The RMD rules are designed to spread out the distribution of your entire interest in a traditional IRA or retirement plan account account over your lifetime. The purpose of the rules is to ensure that people don’t just accumulate retirement accounts, defer taxation and leave the funds as an inheritance. Rather, RMDs generally have the effect of producing taxable income during your lifetime.

Which retirement vehicles are subject to RMD rules?

In addition to traditional IRAs, simplified employee pension (SEP) IRAs and SIMPLE IRAs are subject to RMD rules. Roth IRAs, however, are not subject to these rules while you are alive. Although you are not required to take distributions from a Roth IRA during your lifetime, your beneficiary will generally be required to take distributions from the Roth IRA after your death.

Employer-sponsored retirement plans that are subject to the RMD rules include qualified pension plans, qualified stock bonus plans, and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also subject to these rules. If you are uncertain as to whether the RMD rules apply to your employer-sponsored plan, you should consult your plan administrator or a tax professional.

Understand your retirement plan distribution options

Most pension plans pay benefits in the form of an annuity. If you’re married, you usually have the option to elect a higher retirement benefit paid over your lifetime, or a smaller benefit that transfers to your spouse after your death.

Other employer retirement plans, like 401(k)s, typically don’t pay benefits as annuities; the distribution (and investment) options available may be limited. This may be important because if you’re trying to stretch your assets, you’ll want to withdraw money from your retirement accounts as slowly as possible. Doing so will preserve the principal balance, and will also give those funds the chance to continue growing tax-deferred during your retirement years.

When must RMDs be taken?

Generally, your first required distribution from a traditional IRA or retirement plan is in the year you reach age 70 1/2. However, you have some flexibility as to when you actually have to take this first-year distribution. You can take it during the year you reach age 70 1/2, or you can delay it until April 1 of the following year.

Since this first distribution generally must be taken no later than April 1 following the year you reach age 70 1/2, this date is known as your required beginning date. Required distributions for subsequent years must be taken no later than December 31 of each calendar year until you die, or when your balance is reduced to zero. This means that if you decide to delay your first distribution until April 1 in the year after you turn 70 1/2, you will be required to take two distributions during that year; your first year’s required distribution and your second year’s required distribution.

Example: You have a traditional IRA. Your 70th birthday was December 2, 2016, so you will reach age 70 1/2 in 2017. You can take your first RMD during 2017, or you can delay it until April 1, 2018. If you choose to delay your first distribution until 2018, you will have to take two required distributions during 2018 — one for 2017 and one for 2018.

There is one situation in which your required beginning date can be later than described above. If you continue working past age 70 1/2 and are still participating in your employer’s retirement plan, your required beginning date under the plan of your current employer can be as late as April 1 following the calendar year in which you retire (if the retirement plan allows this and you own five percent or less of the company). Again, subsequent distributions must be taken no later than December 31 of each calendar year.

Example(s): You own more than five percent of your employer’s company and you are still working at the company. Your 70th birthday is on December 2, 2016, meaning that you will reach age 70 1/2 in 2017. So you must take your first RMD from your current employer’s plan by April 1, 2018 — even if you’re still working for the company at that time.

You participate in two plans: one with your current employer and one with your former employer. You own less than five percent of each company. Your 70th birthday is on December 2, 2016 (so you’ll reach 70 1/2 on June 2, 2017), but you’ll keep working until you turn 73 on December 2, 2019. You can delay your first RMD from your current employer’s plan until April 1, 2020 — the April 1 following the calendar year in which you retire. However, as to your former employer’s plan, you must take your first distribution (for 2017) no later than April 1, 2018 — the April 1 after reaching age 70 1/2.

Tax considerations

Income tax
Like all distributions from traditional IRAs and retirement plans, RMDs are generally subject to federal (and possibly state) income tax for the year in which you receive the distribution. However, a portion of the funds distributed to you may not be subject to tax if you have ever made after-tax contributions to your IRA or plan.

For example, if some of your traditional IRA contributions were not tax-deductible, those contribution amounts will be income tax-free when you withdraw them from the IRA. This is simply because those dollars were already taxed once. You should consult a tax professional if your IRA or plan contains any after-tax contributions. (Special tax rules apply to Roth IRAs and Roth 401(k)/403(b) contributions.)

Caution: Taxable income from an IRA or retirement plan is taxed at ordinary income tax rates even if the funds represent long-term capital gain or qualifying dividends from stock held within the plan. There are special rules for capital gain treatment in some cases on distributions from retirement plans.

Gift and estate tax
You first need to determine whether or not the federal gift and estate tax will apply to you. If you do not expect the value of your taxable estate to exceed the applicable exclusion amount, then federal gift and estate tax may not be a concern for you. However, state death (or inheritance) tax may be a concern. In some cases, your assets may be subject to more than one type of transfer — tax — for example, the generation-skipping transfer tax may also apply. Consider getting professional advice to establish appropriate strategies to minimize your future gift and estate tax liability.

For example, you might reduce the value of your estate by gifting all or part of your required distribution to your spouse or others. Making gifts to your spouse can sometimes work well if your estate is larger than your spouse’s, and one or both of you will leave an estate larger than the applicable exclusion amount. This strategy can provide your spouse with additional assets to better utilize his or her applicable exclusion amount, thereby minimizing the combined gift and estate tax liabilities of you and your spouse. Be sure to consult an estate planning attorney, however, about this and other possible strategies.

Caution: In addition to federal gift and estate tax, your state may impose its own estate or death tax (or other transfer taxes). Consult an estate planning attorney for details.

Inherited IRAs and retirement plans

Your RMDs from your IRA or plan will cease after your death, but your designated beneficiary (or beneficiaries) will then typically be required to take minimum required distributions from the account. A spouse beneficiary may generally roll over an inherited IRA or plan account into an IRA in the spouse’s own name, allowing the spouse to delay taking additional required distributions until he or she turns 70 1/2.

As with required lifetime distributions, proper planning for required post-death distributions is essential. You should consult an estate planning attorney and/or a tax professional.